Equity-Market Trading Restrictions and Credit Prices
50 Pages Posted: 30 Oct 2017 Last revised: 27 Feb 2018
Date Written: February 26, 2018
We examine how equity-market trading restrictions affect credit prices. Using short-sale constraints (SSCs) as a proxy for trading restrictions, we examine two specific sources of variation — the randomized Regulation SHO experiment and time-series variation in short-selling bans during the 2008 financial crisis. In both analyses, we find that greater SSCs are associated with significantly higher credit-default-swap (CDS) spreads. Changes in the term structure of CDS spreads suggest that this increase is attributable to a decrease in the availability of default-risk-relevant information. Further, using a default-model-prediction framework, we document that it is more difficult to accurately assess default risk when short selling is constrained, which corroborates information risk as a channel through which SSCs lead to higher credit prices.
Keywords: Short-sale constraints, Information risk, Credit prices, CDS spreads
JEL Classification: G15, G33, G38, M41
Suggested Citation: Suggested Citation